|dc.description.abstract||This study examines managerial incentives and practices associated with firms’ tax strategy choices, as well as the relative importance of these factors in determining the primary focus of firms’ tax strategies. Understanding the determinants of firms’ tax strategy choices is important because the Scholes-Wolfson framework argues that the goal of effective tax planning is to maximize after-tax returns. Therefore, identifying managerial incentives and practices that influence tax strategy choice provides insight into how firms encourage tax planning to improve firm value. Using seemingly unrelated bivariate probit regression, I investigate firms’ tendencies to focus on one of two tax strategies: a sustainable tax strategy, which strives to achieve a consistent tax outcome over time, and a minimization tax strategy, which seeks to achieve the lowest possible tax outcome.
Controlling for the interdependence of tax strategies, I find that firms are more likely to emphasize a sustainable tax strategy when the CEO’s wealth is more sensitive to changes in the firm’s stock price and less likely to emphasize sustainability when the firm receives more information from its directors’ connections. In contrast, a firm is more likely to concentrate on a minimization tax strategy when the CEO’s wealth is more sensitive to changes in stock return volatility, the firm hires a tax expert audit firm for tax services, or the firm receives more information from its directors’ connections. Finally, I find that managerial incentives are the most important factors for the choice of tax strategy, followed by the practices of obtaining expert tax advice and information from directors’ connections. This study contributes to the literature by providing evidence that managerial incentives and practices are associated with firms’ tax strategy choices, a decision that precedes observed tax outcomes and cannot necessarily be inferred from tax outcomes alone. Furthermore, a firm’s tax outcome depends upon its tax strategy, and thus, by identifying managerial incentives and practices that affect tax strategy choice, this study provides an additional explanation for the variation in tax outcomes observed across firms, as well as develops expectations regarding the tax strategy that firms are likely to employ.||en